Microfinance Focus, December 8, 2011: Monday, November 14th 2011 saw the culmination of several years of delicate preparation in a packed conference centre in Valladolid, Spain. The fifth Global Microcredit Summit (held every few years – with regional conferences in between) kicked off in the magnificent Centro Cultural Miguel Delibes, with an opening ceremony full of music, pomp, and a great deal of gratitude – in the particular direction of Sam Daley-Harris, the outgoing Director of the Microcredit Summit Campaign.

Queen Sofia of Spain has been an impressive and dedicated supporter of the microfinance sector since its early days. After welcomes to the city of Valladolid and the region of Castilla y Leon by the Mayor and Governor respectively, and an outline of Spain’s development priorities by the Secretary of State for International Cooperation, Queen Sofia took the podium to declare open the fifth Global Microcredit Summit.

Describing the summit “not just [as] a forum for debate, and for the exchange of experiences”, it aims to promote “two basic goals”: to enable about 175m families to reach basic financial services by 2015, and to get 100m of the poorest families on earth above the US$1/day income threshold.

These objectives date from several years ago, and laudable as they are, it was clear from the offset – not to mention the plenary and workshop papers circulated in the weeks before – that the concerns of the industry have expanded to include other matters. The so-called ‘crisis’ in India (Andhra Pradesh in particular) continued to dominate the agenda, not just as a localised, acute issue in one of the largest microfinance markets in the world, but as a clarion call for the industry to wake up.

The industry’s ‘father’, as we are repeatedly informed, is Professor Yunus, who reiterated at the Opening Ceremony his vision of a sector that is anathema to profiteering (and probably to profit too), but painted a rosy picture of microfinance compared to the broken, mainstream financial sector. “Microcredit is a way of helping future generations…dark clouds are gathering [in the broader global economy] and they will not go away; they will create frustration and disappointment, a great deal of unemployment and tension [in the West]”. Microfinance, he argued, by contrast “is a shining hope, creating light at the end of the tunnel”.

There must be plenty of light to follow, as it is an industry that was globally well represented. Roughly 1600 delegates were in attendance. Without seeing an actual breakdown, it was clear that Africa, Latin and Central America and the Indian subcontinent were well represented with practitioners. MIVs, commercial banks, analysts and donors made up most of the balance – with a surprisingly broad contingent of media present throughout the whole summit – evidence, perhaps, of the reputational hit the sector has taken in the last couple of years, and how microfinance has long since left behind the periphery of global finance. Having the Queen in attendance obviously helped, too.

The Summit, as each before it, had a mixture of plenary sessions, workshops and associated sessions. Perhaps more than previously, however, there were dominant themes for each day.

Day One saw the presentation of the most recent incarnation of the Seal of Excellent for Poverty Outreach and Transformation in Microfinance. The Seal has as its aim, in the words of its author, EDA Systems’ Frances Sinha, “to analyse the value of microcredit in the lives of the poorest people. Not only must it be sustainable, but we must also analyse the value we can offer to customers”.

The Seal had its conception at the regional microcredit summit in Nairobi in April 2010. It seeks to provide another valuable player in the growing Social Performance Management movement, supplementing the ‘Do No Harm’ client protection of the SMART Campaign, and the various initiatives of the Social Performance Task Force. It remains a work in progress (testing in beta will begin in 2012) but it was clear to anyone in attendance: the Summit and the Seal are very much familiar bedfellows. The Seal is Daley-Harris’ ‘baby’ (so to speak), and it is his vision of microfinance’s “transformational” (positively received) and “redemptive” nature (very negatively received) that is the DNA of the Seal of Excellence. Whatever one’s thought on its prospects to become an industry standard of Best Practice in SPM, it will be Sam’s legacy, for better or worse, to the Microcredit Summit Campaign he leaves behind.

Day Two had a dual theme: “challenges” and “social business” (if a conference with twenty concurrent sessions can be said to have themes). The day kicked off with the usual plenary – this time the presentation by Anton Simanowitz (of the Institute of Development Studies, Imp-Act Consortium and SPTF) of his commissioned paper: “Challenges to the Field and Solutions: Over-Indebtedness, Client Drop-Outs, Unethical Collection Practices, Exorbitant Interest Rates, Mission Drift, Poor Governance Structures and More” – a title which exemplifies just how significant are the challenges facing the industry.

Joined on a panel by representatives from the USA, Ethiopia, Pakistan and Bolivia, Simanowitz argued that it would be folly to look at recent crises as one-offs; rather, there are lessons to be learned by all parts of the sector and in all places. It is not to endorse the “Bateman” School – that microfinance is a flawed concept in itself and destined to fail, but that there must be (and indeed, already is) an industry-wide recognition that certain assumptions must be challenges. These assumptions are many, but include the belief that loans to the poor, in and of themselves, alleviate poverty; that microfinance is a development panacea; that zero tolerance on defaults is a precedent that needs to be maintained. Rather, we must “find ways to increase effectiveness…to achieve a more conscious and transparent balance between the social and commercial goals in all aspects of strategy and management”.

The “deepening of financial inclusion” to create value for clients, protect clients from harm, and put forward regulation and governance which works with effective management systems to deliver on the objectives of overcoming exclusion of poor, vulnerable and marginalised groups, was key – and something endorsed by the panellists.

There is no doubt that things are improving, argued Tilman Ehrbeck of CGAP, who pointed to the emergence of the mobile phone in the developing world as perhaps the greatest modern day driver of development, and a massive opportunity for the industry. “Out of crisis comes innovation”, said Roshaneh Zafar of Kashf Foundation, who emphasised, like Simanowitz, the importance of microfinance beyond credit alone; with savings paramount.

Despite the overwhelming and dire title for the session’s paper (a title no doubt deliberately provocative), the session was strangely positive and upbeat. For one thing, the mere fact that the SPTF, Imp-Act Consortium, SMART Campaign and SEAL exist reflects the very healthy debate on standard setting for social performance that is underway. Second, the first step towards any solution is recognition of a problem. If there was any doubt before, there can be none now: the industry recognises some of its flawed past assumptions and is concertedly working on re-designing itself. Which is more than you can say for the mainstream banking sector.

Professor Yunus reserves his most scathing contempt for this sector, and used the second plenary session of Day Two to argue for “social business”: Social Business and Microfinance: Building Partnerships with Corporations and Other Entities to Speed the End of Poverty. Insisting that his work with social business is not a move away from microcredit, but that microcredit is in fact a social business, he argued for business-oriented solutions to social problems, drawing on many experiences as MD of Grameen Bank.

Yunus’ notion of a social business (a company that should be profitable, but re-invests much or all of the profits for social ends) is well exemplified by Groupe Danone, the Chairman and CEO of which, Franck Riboud, was present on the session Panel. “Yes, we need profits”, Riboud said. “We need to cover costs, provide a return to shareholders, but returns should be more than money”, adding that crucial to convincing shareholders about social businesses is explaining the concept well and ensuring observable results.

Various workshop sessions that ran between the two main plenaries of the day demonstrated clearly just how vigorous and wide-ranging the microfinance industry has become. They ranged from gender issues and measuring impact; to strengthening institutions and transparency in interest rate pricing; from microinsurance that goes beyond Credit Life, to agricultural technologies and housing products for slum dwellers; from, encouraging children’s education to Best Practices for microfinance networks. There were even two sessions relating to Industrialised Countries. It needs hardly be said, but the days of microfinance being just $30 loans to Bangladeshi women for sewing machines are long, long gone.

Day Three started with a plenary session that many might have thought out of place: a motivational speech by Dave Ellis from the Brande Foundation, which was descreibed as a “Guided Inquiry and Discussion”; in which the delegates were encouraged to participate in the Socratic process of how they as practitioners could achieve their personal and organisational objectives.

The main draw card of the day was the plenary session on how microfinance can support rural farmers and agriculture. Sir Fazle Hasan Abed, Dr. Mahabub Hossain, Susan Davis and Rod Dubitsky had co-written a paper entitled Using Microfinance Plus Agricultural Services to Improve Rural Livelihoods and Food Security, which was presented by Shameran Abed, BRAC’s Director of Microfinance Programs. The paper argued that MFIs “can play a critical role in agricultural development on two fronts: bridging the funding gap by providing MFI loans to rural areas in general and farmers in particular; and the network effect – where MFIs use their network as a “trusted conduit” to help deploy agricultural innovations to rural areas that many players would struggle to reach.

The theme of agriculture continued into the second half of this plenary on Day Three: a focus on the so-called ‘last mile’ problem. Alex Counts, CEO of Grameen Foundation, is the author of a summit paper entitled Towards Reinventing Microfinance Through Solving the Last Mile Problem: Bringing Clean Energy Solutions and Actionable Information to the Poor. This considered energy poverty, climate change (which disproportionately affects the poorest), and among others, how technological developments (smartphones and apps in particular) can provide agricultural best practice, weather, market prices etc to small farmers.

Counts, presenting his paper, said “A vast and growing body of technological innovation and knowledge can directly benefit the poor in their struggles to lead healthy and productive lives, and ensure educational opportunities”, with the caveat that this is a challenge rarely overcome – and a return to back to basics philosophy of ethics will be required.

Joining Alex on the panel was Prakash Bakshi, Chairman of National Bank for Agriculture and Rural Development (NABARD) in India, who noted the complementary nature of the approaches: “If incomes improves, the quality of life and health improve, which in turn help improve income.” Claudio González Vega from Ohio State University reminded delegates that clients are not a homogeneous group, but each has unique needs and challenges: “Standardization”, he said, “is our greatest threat.”

Nicola Armacost, Managing Director and Co-Founder of ARC Finance, observed the disproportionate effect on the poor that climate change has, and that a focus on products beyond credit alone is critical.

Describing ARC’s core work, she said that energy lending, “is fundamentally about improving the livelihoods and quality of life of poor people” – especially for women and children, who are overwhelmingly responsible for fuel collection, and cooking in confined spaces – with adverse educational and health consequences for both.

Several dozen more workshops and associated sessions rounded off the final day of the Summit ‘proper’ (another day was put aside for optional, day-long sessions), but the one which attracted several hundred people was the session based on a deliberate false dichotomy: “IPOs – Salvation or Downfall?”

This session was based on two papers, arguing either side of the case – making this session unusually adversarial in format (perhaps appropriate considering the opprobrium directed at SKS and Compartamos in recent years). Sanjay Sinha of M-CRIL and EDA Rural Systems spoke first, and argued how the overheated market in Indian microfinance, and the run-up to the SKS IPO in 2010 precipitated the Indian crisis. Noting that the market had become geared “to profit maximisation in the short term”, Sanjay argued that microfinance is still a “development activity that needs greater sensitivity”.

In retrospect, the warnings were all there: ambitious business plans, high valuations, high growth, high valuation for SKS shares to private equity and high net worth individuals, meant that collection practices and growth stragegies were put in place that were far from a client-centred industry. Plus, of course, the commercial success of the Compartamos IPO in 2007 meant that investors were pushing hard. New NBFIs sprang up, there was a “get rich quick” rush for “low hanging fruit”, leading to multiple lending, decline in customer service, pressure on managements, staff and perhaps client coercion too.

Carlos Danel of Compartamos responded with integrity, clarity and bravery. “I don’t think IPOs are necessarily the downfall…but they are not the salvation either”. Arguing that the Mexican microfinance industry has become much more positively competitive because of the IPO (“In 2007, our competition had 400,000 borrowers. Now it has 3 million… we are creating not just an institution but creating an industry”), Carlos emphasised the need for client protection and appropriate regulation to avoid a repeat of SKS.

Before the session, the moderator asked the huge audience for a show of hands, for those who thought IPOs were the downfall (many), salvation (virtually none) or ‘don’t know’ (some). After the session, he repeated it. Downfall was ‘some’, salvation remained virtually none, ‘don’t know remained ‘some’, and a new category emerged: a plurality of the audience thought that IPOs could be positive or negative, depending on the context, procedures and circumstances. As this is surely the only rational response, most of the speakers were very satisfied with the engaging and adversarial session.

A report of the Fifth Microcredit Summit that sought to summarise several plenaries, tens of papers, and many dozens of associated sessions and workshops would be hundreds or thousands of pages long. For many delegates, the really important work was done in the corridors; the coffee breaks, in which new partnerships are born and new ideas discussed. For an industry that a year ago was on its knees at the hands of a sometimes ill-informed, reactionary and alarmist lay media, these connections between microinsurers, mobile providers, donors, technologists and investors are going to dictate the messages of the Sixth Microcredit Summit and beyond.

Naturally, everyone takes something different from a big meeting like this. For some people it’s about networking; for others it is about learning best practice to implement in their own organisation. If the 1600 delegates were asked to write a report, it’s likely that 1600 quite different responses would be given. But one striking feature worth noting was that the industry-wide ‘backslapping’ – the self-congratulation for having cracked the development ‘code’, as it were – was totally absent. This was a summit that asked itself three main questions: how do we re-focus on providing value for the Client? How do we measure what we’re actually doing? And how do we create an industry that lives up to what it claims – something sustainable, ethical, and ultimately a global force for good?